Fund manager's comment/Julie Dent
The global economic slowdown continues to dampen investor confidence. Global equity markets have spiralled downwards, albeit unevenly, with the slowdown concentrated in economies linked to the US and global technology, media and telecoms companies.
Large-cap stocks have underperformed small caps and tech-orientated growth sectors have been hit by deteriorating earnings growth and business momentum. Defensive sectors such as resources, utilities and household goods have proved more stable.
The latest round of US and UK interest rate cuts has improved investor confidence and further monetary easing is anticipated. While continuing volatility and a protracted global recovery is likely, current market sentiment appears excessively negative.
Falling markets have left many stocks attractively priced and technology, media and telecoms stock valuations are now significantly lower. A growing consensus is emerging that the stock markets have already priced in a lot of the bad news.
As a result, our favoured asset class is equities and we especially favour US and UK stocks. While relatively positive on European equities in the medium term, a more cautious stance has been adopted in the short term, as we watch to see if the European Central Bank (ECB) will be more responsive to deteriorating Euroland economic data.
The ECB has maintained a fairly consistent argument that low trade exposure insulates European economies from global slowdown. To an extent throughout 2000, this argument had some credibility, as Euroland markets were driven by a weak euro, rising inflation and strong earnings growth from oil and banking stocks. As a result, ECB rates rose from 3.25% to 4.75%.
However, recent data has eroded the ECB's argument of Euroland's immunity from the global slowdown. Helped by falling energy prices, eurozone inflation has fallen, albeit still above the ECB's target ceiling of 2% but below the November 2000 peak of 2.9%. Euroland economic sentiment continues to decline, with the impact of global slowdown hitting Germany, Europe's largest economy, hardest.
New activity has declined and German unemployment is rising. European market sectors have also been negatively impacted with technology, media and telecoms earnings feeling the biggest impact of downgrades.
Despite the ECB's ongoing protestations against Euroland rate cuts, it is clear Euroland growth is impacted by the US slowdown. Forward looking indicators such as producer prices and the purchasing managers' survey suggest after peaking at 2.9% in November, Euroland inflation is heading back below 2%. While slowing growth will give the ECB scope to cut rates from 4.75% to around 4%, we maintain a cautious stance until we see how the ECB reacts.
l Investor confidence has improved.
l UK and US equities look attractive.
l Euroland inflation set to fall.
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